Market Insights > Metals

Base Metals Dashboard - Week Ending February 3, 2023

February 03, 2023 | Chris Stadele

Aluminum

China exported a record 6.6 million mt of unwrought aluminum last year; however, a recent hike on their aluminum export tariff could lead to fewer shipments this year. This could ultimately tighten global supplies because China is the world’s largest aluminum exporter. Effective January 1, China raised its export tariff on aluminum products to 30%, up from 15% previously. The Chinese State Council, which sets tariff policy, claims the export tariff hike is meant to spur China’s domestic demand. The previous export tariff was set in 2006. (Source: Reuters, CNBC India, China Customs)

The next data release detailing China’s aluminum export volumes isn’t until April 13, so it will be at least two months before the market can interpret how impactful the new tariff regime will be. However, history suggests that volumes could be down. China normally increases exports as global prices rise, and this was true in the first half of 2022. However, as prices fell in 2H2022, exports also fell. Given that LME aluminum prices are approximately 35% off last year’s high, it is likely that China’s export window is already closed, even if without the new, higher export tariff.

As for aluminum demand, shifting automotive production into electric vehicles will require more aluminum than traditional internal combustion engine vehicles. To help offset the weight of battery packs, many auto manufacturers will produce components out of lighter-weight aluminum instead of steel. These aluminum parts include not only legacy components such as crash management systems but also EV-specific battery packs. According to consultant Ducker Carlisle, last year the average vehicle produced contained 299 lbs of cast aluminum and 56 lbs of aluminum extrusions. However, due to the increasing market share by EVs, the average vehicle will contain 304 lbs of cast aluminum and 89 lbs of aluminum extrusions. Moreover, EVs will compromise 31% of the North American light vehicle market, up from 6% last year, according to Ducker Carlisle’s projections.

AEGIS notes that greater aluminum demand by US automotive industry could impact aluminum Midwest Premium (MWP) prices. First, greater demand for American aluminum products is generally bullish to prices. Secondly, domestic freight costs for moving aluminum products into the Midwest are included in the MWP, thus, greater freight demand could the MWP higher. Finally, the US imports approximately $150 billion worth of automotive parts each year, many of which are made from aluminum. As import tariffs are also included in the MWP, rising aluminum imports could also drive the MWP higher. (Source: S&P Global, Automotive Aftermarket Network)

Zinc

Zinc is one of the top-performing LME metals so far this year, and there is potential for upside price risk. LME warehouse stocks have fallen dramatically so far this year, which could signal that global supplies are tight. As of February 3, total LME warehouse inventories were 16,375 mt, down approximately 48% on the year. This recent scramble to buy zinc stocks has pushed LME inventories to the lowest levels since 1986. AEGIS closely watches LME warehouse levels, as LME inventories are generally thought to be a gauge of metal supply constraints. Zinc prices could see more upside if traders and end-users rush to buy inventory from the LME or other sources. (Source: Bloomberg)

We also note that the civil unrest in Peru could further hinder global zinc supplies. The political protests that began in early December have worsened in recent weeks, forcing several large zinc miners to curtail fully or partially due to road blockades. Peru is the world’s second-largest zinc miner, so any supply disruptions there will likely have an outsized impact on market prices.

Copper

America’s reliance on foreign metals shows no sign of slowing. Last Thursday, the White House issued a 20-year moratorium on new mining in northern Minnesota. This moratorium effectively blocks Antofagasta Plc's anticipated Twin Metals copper and nickel mine project from going forward. The leases on this proposed mine have had a turbulent history. On Wednesday, the Department of Interior pulled the leases, claiming that the Trump administration had reinstated them “in error.” The leases were initially pulled by then-President Obama in 2016; however, Trump later reversed that decision. According to their website, the company projected the mine would process approximately 18,000 mt of ore per day that would have produced separate concentrates – copper, nickel/cobalt, and platinum-group metals.

According to the New York Times, the US was “nearly self-sufficient” for its copper usage until the 1990s. However, because older mines have closed or become depleted, the US now relies on foreign supply for about half of its copper usage. This reliance on imports could increase to nearly two-thirds of usage by 2035, according to S&P Global. (Sources: Reuters, Bloomberg, S&P Global, New York Times, Antofagasta)

Nickel

To grow its processing capabilities and attract foreign direct investment, the Philippines is contemplating either taxing or outright banning nickel ore exports, according to Bloomberg. The move, if implemented, is similar to one that Indonesia recently applied. Several large Chinese nickel processors built smelters and refineries in Indonesia after the Indonesian government banned nickel ore exports in 2020. This has “inspired” the Philippines to consider a similar ban on nickel ore exports. The Philippines currently has 34 nickel mines but only two nickel processing plants. The Philippines’ Environment and Natural Resources Secretary Antonia Yulo Loyzaga recently stated she aims to add three more mineral processing facilities during her term.

Within hours of this announcement, the Philippine Nickel Industry Association blasted the proposed export tariff, claiming it will “kill the industry.” They also stated that comparing the Philippines to Indonesia is “flawed” because Indonesia has much larger nickel reserves than the Philippines. Moreover, Indonesia’s larger reserves make it more suitable for long-term investment, according to the association. Based on USGS data, the Philippines’ reserves are approximately one-fifth the size of Indonesia’s. The Philippines has the world’s second-largest nickel reserves and mine production, bested only by Indonesia.

AEGIS notes that if achieved, the Philippines’ long-term goal of becoming a major refined nickel producer will likely have little market impact. According to Chinese customs data, approximately 83% of their nickel ore imports come from the Philippines. Similarly, the bulk of the Philippines’ nickel ore exports goes to China. Thus, if the new processing plants in the Philippines are Chinese owned, then switching the processing from China to the Philippines will likely have little market impact. However, there are potential short-term impacts while the Philippines’ nickel industry evolves from a raw nickel ore exporter to a refined nickel exporter. As one anonymous Chinese trader interviewed by Reuters recently stated, “Given the lion’s share of ore supply [comes] from the Philippines, an export tax would result in higher costs for producers in China.” (Source: Bloomberg, Reuters, USGS)

LME Aluminum

LME Aluminum 3M settled at $2,569.50/mt, down $57.50/mt on the week.

Aluminum prices were down this week. This has caused most of the forward curve to shift vertically lower by approximately $60/mt. It remains in contango, meaning that nearby prices are lower than forward prices. Aluminum consumers concerned about increasing prices might consider hedging future needs by buying swaps or call options. End-users might consider strategies that use only swaps or options or a combination of both, depending on risk tolerance. The aluminum market has sufficient liquidity to use swaps and options. Please contact AEGIS for specific strategies that fit your operations.

Midwest Premium

Prompt month CME MWP last settled at 29.0¢/lb this week.

The CME Midwest Premium market is backwardated through April 2023 but then becomes largely flat for the remainder of this year. The CME Midwest Premium swap market is thinly traded, and there is no options market. Hedging in this thinly traded market is challenging, so we recommend using strategically placed limit orders. Please contact AEGIS for specific strategies that fit your operations.

* Please note all these charts are for desktop only. *

LME Copper

LME Copper 3M settled at $8,980.50/mt, down $283/mt on the week.

Compared to last Friday, LME Copper's forward curve has shifted lower by about $280/mt. The forward curve is now relatively flat throughout 2023 but becomes backwardated in 2024 and beyond. The copper market has sufficient liquidity to use swaps and options. Consumers might consider strategies that use only swaps or options or a combination of both, depending upon their risk tolerance. Please contact AEGIS for specific strategies that fit your operations.

LME Nickel

LME Nickel 3M settled at $28,612/mt, down $290/mt on the week.

As prices were down this week, nickel’s forward curve has also shifted vertically lower, by about $300/mt. It remains in contango, meaning that spot prices are lower than futures prices. The nickel market has sufficient liquidity to use swaps and options. Consumers might consider strategies that use only swaps or options or a combination of both, depending upon your risk tolerance. Please contact AEGIS for specific strategies that fit your operations.

CME Hot Rolled Coil (HRC) Steel

Prompt month HRC Steel last settled at $797/T, up $22/T on the week.

For CME HRC Steel, liquidity is low for swaps, but hedging can still be done with limit orders. The same is true for options. Similar to other metals, a combination of both swaps and options might work in certain cases, depending upon your risk tolerance. Please contact AEGIS for specific strategies that fit your operations.